Palestinians in refugee camps ``live on a combination of nostalgia for the past and illusions about the future,'' writes Israeli journalist Rubinstein. Most Arabs who fled or were expelled from the newly created State of Israel in 1948 regarded their absence as a temporary affair. Even today the refugees' absolute ``right of return''--which implies the destruction of Israel--underlines all PLO decisions and statements. This expectation, according to Rubinstein, is fueled by ``a genuine sense of displacement'' rather than by an Arab myth of loss of homeland cultivated to serve political ends, as some Israeli spokespeople maintain. This short, sensitive exploration of the Palestinian refugees' conceptual world draws liberally on novels, stories, poetry, plays, memoirs and historical studies. Arguing that each side's perception of the other is rooted in prejudice and suspicion, Rubinstein's analysis speaks to moderates on both sides. (Jan.)